If you are a small business owner struggling with debt, you need expert advice to make decisions about the future of your business. While a legal entity such as a corporation or LLC may file bankruptcy, a corporate bankruptcy will not remove your personal liability for guaranteed business leases, contracts, or other debts. As a result, many small business owners file personal bankruptcy. If an exit strategy from the corporation is needed, personal bankruptcy can enable you to walk away from guaranteed business debt. Alternatively, you may be able to preserve your livelihood without the burden of the corporate debt by restructuring the business prior to filing personal bankruptcy.
Bankruptcy for business owners is very complicated and requires expertise and experience. Wink & Wink offers both. Contact us to schedule a FREE CONSULTATION.
The Limitations of Corporate Bankruptcy
While a legal entity such as a corporation or LLC may file bankruptcy, it is not eligible for a discharge and cannot get out of debt in bankruptcy the way an individual can. The options for corporate bankruptcy are limited to either liquidating business assets in Chapter 7 bankruptcy or attempting to restructure the corporate debt in a Chapter 11 bankruptcy.
Typically, a small business owner can liquidate and dissolve a corporation or LLC without the need for Chapter 7 bankruptcy. However, if creditors are fighting over the assets of a failing corporation, Chapter 7 bankruptcy acts as an orderly way to liquidate corporate assets while limiting the stress and potential liability of the business owner.
Chapter 11 bankruptcy can enable a corporation to negotiate with creditors and restructure debt. However, a corporation’s ability to force a restructuring on the creditors is limited and corporations often fail to achieve debt restructuring in Chapter 11 bankruptcy. Additionally, Chapter 11 bankruptcy typically requires tens of thousands in legal fees. Because of this, Chapter 11 bankruptcy is not practical for most small businesses.
Wipe Out Personal Liability For Business Debt
If your business is struggling to pay its debt, the solution is rarely as simple as dissolving the business and starting a new job. This is because you have likely personally guaranteed some of your business’s debt. As a condition to entering into a contract with a small business, commercial landlords and banks typically require a personal guarantee from the business owner. And nearly all corporate credit cards are guaranteed by the business owner. If you’ve guaranteed business debt, the business creditors can go after you personally to collect on these obligations. Because of this, you likely need a personal debt relief strategy because of your business.
Unfortunately, putting your corporation into bankruptcy, whether in Chapter 7 or Chapter 11, will not remove your personal liability for guaranteed business debts. However, you can often get out of liability for the guaranteed business debt in personal bankruptcy. If you are looking to close the business, it is typically best to do this before filing bankruptcy. In doing so, you will want to be aware of personal liability for business debts that you cannot get out of in bankruptcy, such as sales and payroll taxes. If possible, you should direct any remaining business assets toward the payment of these non-dischargeable debts. Wink & Wink can advise you on dissolving your business, winding down its operations, and utilizing any remaining business assets to pay non-dischargeable debts prior to filing personal bankruptcy.
If you want to continue operating the business, it may be possible to preserve business assets through your personal bankruptcy. In Colorado, business owners are allowed to keep up to $60,000 worth of “tools of the trade” (business assets such as tools, business equipment, and inventory) in order to make a living after filing for bankruptcy. However, if your business is a corporation or LLC, you will likely need to restructure it as a sole proprietorship prior to filing bankruptcy for two reasons. First, in order to protect business assets as “tools of the trade” through bankruptcy, you must own the assets as a sole proprietor and not through a corporation or LLC. Second, your personal bankruptcy will not remove your corporation or LLC’s liability for its debt. Wink & Wink can advise you on restructuring your business prior to filing personal bankruptcy so that you can protect business assets and continue your livelihood free from debt.
Filing for bankruptcy as a small business owner often requires significant advance planning and legal advice, which is why it is important for a small business owner to seek the advice of a bankruptcy attorney prior to filing for bankruptcy. Wink & Wink has extensive experience in representing small business owners in bankruptcy and can counsel you through the entire process. Contact us to schedule a FREE CONSULTATION.